LNG shortfall boosts demand for AOC prompt contracts

Robert Songer

13-Mar-2015

A combination of contract optimisation and more expensive balancing costs may be behind increased interest in short-term products at the Spanish AOC, traders believe.

A strong interest has recently developed in prompt products at Spanish gas market the AOC, according to traders active there. Both on-screen deals and off-screen deals reported to ICIS point to a meaningful increase in the volume of trades going through in Spain. In contrast, little interest in later-dated products – including April, the front month – have been reported.

Strong bidding interest and an absence of offers has pulled Balance of the Month (BOM) prices up by around €1/MWh since Friday, some of which have transacted in a high volume, as shippers have turned to the market to cover positions.

On Thursday, BOM traded in the sizable volume of 4,400MWh/day, coming on the heels of another BOM deal on Tuesday in 1,000MWh/day as well as one totalling 2,500MWh/day in Day-ahead, to list a few of this week’s deals. ICIS has learnt of at least two more over the last week. Clearly, the interest in trading BOM indicates transactions for gas being delivered between now and the end of the March, which is in turn the end of the first quarter.

“The market has been choppy – three weeks ago the prices was €22-23/MWh. This peak has come because of an increase in demand in March recently, because of some problems with ships, with balancing – all marketers have their own problems – but … it’s not a sustainable peak,” one trader at a major shipper told ICIS.

Traders believe there are a couple of reasons for this increased level of trading activity. One of these is likely to be temporary, but the other may turn out to be a more permanent fixture.

The first relates to contract optimisation, while the second relates to the introduction of new market-based balancing rules, which entered the statute from 1 March this year.

Contract optimisation

Since almost all of the gas entering Spain does so under the terms of long-term contracts linked to the price of oil, Spain’s gas importers are highly susceptible to oil-price volatility. While a collapse in oil prices since September 2014 has had some effect on prices being paid for gas delivered during Q1 ’15 under various contracts, it is guaranteed to lead to larger, more wholesale reductions from April onwards with the start of Q2 ’15.

Although this will continue into the third quarter, when prices are expected to fall even further, it is the difference between gas delivered now, in Q1 ’15, and throughout the second quarter that is keeping traders worrying about how to optimise their portfolios, and a desire to minimise Q1 imports and instead deplete stocks means that in some cases LNG stocks have now become dangerously low, with tanks at three of Spain’s LNG terminals this week less 30% full.

“Suppliers are buying gas in the spot market now because their long-term contract gas is maybe 20% more expensive than the spot,” the first trader said, pointing out that from April contract prices would fall heavily.

“Shippers have been reducing their LNG stocks [throughout the course of Q1 ‘15] to try to reduce the amount of gas they need to bring in, because the [Q1] long-term contract prices are so high [relative to Q2 ’15 prices],” a trader at another major company said on Friday. “But the problem is there is a difference between having the intention [to optimise between the quarters] and the ability to do it – if there are delays in LNG deliveries it can introduce technical problems.”

These logistical issues – based on a desire to minimise purchases in Q1 ’15 and roll them instead into the cheaper second quarter – had been causing “technical and logistical problems”, a third trader agreed, pointing to a reduction in LNG arrivals in March as the defining factor in rising spot prices.

Nominations data from Spanish transmission system operator Enagas this week shows that just 18 LNG vessels are expected to discharge during March, down from 21 in earlier schedules published at the end of February. This represents around 550,000mcm of LNG (around 3.2TWh) less than was originally forecast, with the cancellation of one of two reloads initially scheduled for March freeing up only around 130,000cbm of LNG, meaning still more than 400,000cbm less LNG than initially predicted.

“Suppliers are buying gas in the spot market now because their long-term contract gas is maybe 20% more expensive than the spot. It’s always the same – if everyone buys spot and is not using their long term contracts, the price spikes. Also, if you want to buy gas, now is the time because of the exchange rate,” one source said.

New balancing costs

Adding to the impact of this minor spike in demand for gas are new rules on balancing.

“It’s more important to be balanced now, because of the new balancing rules,” the second trader said.

Since 1 March it has become a lot more expensive to be out of balance, with penalties now administered both for those in short positions and those that are long that can quickly leave shippers far more out of pocket than they would have been before until 28 February this year. ICIS will analyse the effect of the new rules on liquidity when they have had time to bed in, but it is appears they are already having an effect on trading mentalities.

The first trader backed up this assertion. “Until 1 March you only paid a charge if you were short in gas; now you pay if you are long, too.” In addition, he said, under the old rules in some cases where prices diverged sharply shippers might consider themselves better off to pay the imbalance cost and obtain the gas afterwards, but that was no longer an option with the obligation to have zero imbalance on a daily basis.

However the second – and more important – change was the way that the obligation to be balanced every day was removing the incentive for counterparties to do swaps, in essence making them more professional and less likely to view swaps as a viable balancing tool. “This is affecting the relationships between marketers because you have to be more accurate about your forecasting … so the [what were formerly cost-free] swaps start to have cost. Doing too many free swaps becomes a problem.” It remains to be seen whether this new professionalism will lead to a sustained increase in spot trading in Spain, but the likelihood of this will increase in the run up to October 2016 which is the deadline by which Spain must have implemented the Europe-wide network code for balancing. Rob Songer

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?